Ramit Sethi on Why Tracking Every Cent Doesn’t Put You in Control
Written by
Crystal Mayer
Edited by
Carly Brashears
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If you are trying to get your finances in check, you have likely heard that you should track your spending. Keeping a running toll of all your income and expenses can help you stay on budget and make the necessary adjustments to hit your financial goals. But, too much tracking may not be doing you any favors.
Ramit Sethi said that despite what most people believe, the “process of tracking every last cent” does not put you in control of your finances. The work is often not worth the payout since it won’t change your actual finances. Instead, he suggested focusing on a more simplistic tracking system, high-value areas and strategic decisions.
Why You Shouldn’t Track Every Dollar You Spend
Financial guru Ramit Sethi recently said to a couple on his podcast who meticulously tracked all of their spending, “The reality is that most of this is pointless — manually copying in values from a website to a spreadsheet is not high-value work, nor does it change your financial reality.”
He explained that “[m]ost people genuinely believe that this process of tracking every last cent puts them in control of their money… But it’s not.”
In Episode 105 of I Will Teach You to Be Rich, he expanded on this concept speaking to a couple with similar tracking habits. He explained that people who track every dollar often create overly complicated systems.
Instead, he encourages people to “fight for simplicity.”
“The more successful you get with money, the more you have to fight for simplicity.”
What You Should Be Tracking
Instead of a complex tracking system with 20 categories and even more subcategories, Sethi encouraged his followers to focus on tracking only a few items.
On a recent episode of his podcast called Track These 4 Numbers to Become a Millionaire, he said, “The millionaires I admire the most track only four numbers.”
The four numbers he suggested are fixed costs, investments, savings and guilt-free spending.
Fixed Costs
Sethi said that fixed costs should account for approximately 50% to 60% of your take-home pay. These include things like rent or mortgage payments, utilities, car payments, gas and insurance. These costs usually do not fluctuate each month. He does caution people to keep their fixed costs under 60% of their take-home pay.
“If your fixed costs are higher than that you are going to find it very difficult to save any money,” he said.
Investments
The second thing Sethi encouraged people to track is their long-term investments.
He said this area is vital because “[t]his is where real wealth is created.”
He recommended putting “at least 10% of your take-home pay” in this category.
People should “start as early as possible” and “invest every single month.”
While he advocated putting in a minimum of 10%, he also said that you should increase it by 1% each year.
Savings
Sethi said that savings should be approximately 5% to 10% of your take-home pay. He clarified what savings is by noting, “Your savings category is for money that you’re going to use between one to five years from now.”
Savings can be anything that you are planning to use in the future from a vacation fund to a down payment on a house, but it should include an emergency fund. The emergency fund, Sethi explained, should have enough to cover three to six months of expenses.
Guilt-Free Spending
In his podcast, Sethi said, “The point of money is to use it to live your rich life.”
He noted that you should build in guilt-free spending or money that is spent on stuff that is meaningful to you.
This may account for around 20% to 35% of your take-home pay. It can be used on anything from eating out to vacations or new clothes.
He encouraged people to learn to “spend their money meaningfully” and cautioned against “oversaving.”
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